The Charging Bull Statue is covered by snow in Lower Manhattan during a winter storm on February 1, … [+]
The employment number was a shock to the “boom” economy narrative; it was the biggest consensus miss in history!
The majority of forecasters, even those with scores of economists and huge budgets, simply got the “boom” narrative wrong. The Payroll Survey employment number was an “aberration” they hastily said. But the sister Household Survey tells the same story.
While Initial Unemployment Claims (ICs) are falling, they are still at recessionary levels and remain stubbornly high. Continuing Unemployment Claims (CCs) continue to be a huge concern. And now the markets have begun to recognize that the generous unemployment benefits are actually a disincentive and an impediment to the recovery.
Most major market firms and economists have forecast some form of “systemic” inflation, but not the Fed, and they have stuck to their guns. There has also emerged significant supply responses which will soon quell the “systemic” notion.
The Fed is “worried” about high asset valuations and prices. “Irrational Exuberance II!”
Employment Data
The April Establishment Survey employment data (Payroll Survey) proved to be quite a shock. Expectations ranged rom +700K to +2.1 million; the +266K was the biggest miss in history. The Biden Administration knew the number in advance, and when the President scheduled a press conference immediately after the data release, markets assumed the number would be a blockbuster, and the consensus estimate moved even higher.
Worse, the +266K came after a downward revision of -146K for March and an upward revision of +68K for February, -78K on net. So, the real change for the market based on the numbers the market had just prior to the data release was a net of +188K. That shows you the dangers when “all the experts and forecasts agree.” Once again, Bob Farrell’s rule #9 had it right: “Something else is going to happen.”
For the first time since the generous unemployment benefits have been the order of the day, the media began questioning whether these were working as disincentives. And, of course, at his presser, President Biden said that the apparent slowing in the employment data meant that his blockbuster spending programs should be enacted. That the talk of yet more stimulus pushed equities even higher on Friday, May 7, as visions of yet more Federal Reserve funded debt danced in investors’ heads.
What we found interesting was the speed with which the market pundits moved to the view that the payroll number was an aberration, a mistake. In reality, it wasn’t an aberration because the Household Survey, taken simultaneously with the Payroll Survey, showed a similar result (+328K). The official U3 unemployment rate moved up to 6.1% from 6.0%. The consensus was for a fall to 5.8%.
For several months we have observed (and do so again in today’s commentary) that:
- While Initial Claims (ICs)(a proxy for layoffs), are falling, they are still at recessionary levels.
- Despite “Help Wanted” signs everywhere, Continuing Claims (CCs) remain stubbornly high. In past blogs we wondered if the extra and generous unemployment benefits had become a disincentive. Markets now believe that they are playing a significant role.
- Since a huge proportion of those on the sidelines are Pandemic Unemployment Assistance (PUA) recipients, those disincentives will disappear in early September when (if) PUA ends, and the higher starting wage offers in the lower paying economic sectors will also vanish.
The conclusion here is that the mild increases in wages in those lower paying service sectors are “transient,” i.e., no wage-price spiral or “systemic” inflation.
In the end, the real lesson from the big miss on the employment front is how the majority of the forecasters, especially those with large budgets and scores of economists, could be so wrong. In fact, even after the employment numbers, most still see an economic “boom” and “systemic” inflation. Apparently they believe their own excuse, i.e., that the employment number was an aberration!
Readers of this blog know that we never saw that “boom” because we couldn’t figure out how the pandemic could have altered the economy toward higher growth. So, our thought process has always been that the best we can hope for is a return to the 1%-2% pre-pandemic GDP growth. We still hold to that view.
The Weekly Data
ICs at the state level fell to +505K, a drop of more than -107K according to the Department of Labor. That appears to be good news. It is also wise to remember that these ICs are a proxy for “new” layoffs. The pre-pandemic “normal” for this series is about +200K per week. While +505K is much better than the +700K of early April, it still signals underlying business issues, especially in an economy that is supposedly more than 90% re-opened. ICs in the special PUA programs fell to +101K the week of May 1, down -20K. These were in the high +400Ks in February and March, so, again, substantial progress.
Total All Unemployment Claims
Nevertheless, it is the CCs that continue to be of concern to us. The pre-pandemic “normal” was 2 million (see chart). The number there continues to be a very high 16.2 million, of which 3.8 million are in the state programs and 11.8 million in PUA programs. So, as we have said in several of our last blogs:
- If the PUA programs do end in September, there will be a significant loss of income via those transfer payments which could spell a significant reduction in consumption and economic growth, and
- Perhaps the “Help Wanted” signs will disappear as those nearly 12 million will now be “incented” to find work.
Inflation and the Fed
The Fed, from early on, has been adamant that the “inflation” we have today is “transient.” They have held that ground for several months, not giving in to the inflation-phobes or bond market bears. But in the marketplace, the pervasiveness of the inflation mantra has been breathtaking. Talk about herd mentality. Here is an example of what was in the market as late as Friday, May 7, pre-data release; this from a highly respected economic forecasting firm: “Given the breadth of the upward pressure on both prices and wages, we believe this will develop into a sustained wage-price spiral.”
Given the earlier discussion of the slack in the labor market, once those dis-incenting PUA programs do end, the wage growth that we have recently seen in the lower wage service sectors will dissipate. We also have seen evidence that some of the supply side issues causing price hikes will soon end. For example, semiconductor exports from Taiwan and South Korea are 30%-40% higher than pre-pandemic. In the month of March, there was a 26% increase from pre-pandemic levels in U.S. semiconductor imports, rising to a record high. For all the talk of semiconductor shortages holding back production, auto sales surged 4.3% M/M in April to an 18.5 million annual rate, a rare level only seen five other times in history, and 8% above pre-pandemic levels. It doesn’t appear from this data that the media mantra of semiconductor shortages was at play. What was at play was a huge rebound in demand, which was likely pulled forward by the March/April helicopter money drops. Lumber prices are also frequently mentioned in conjunction with the “systemic” inflation mantra. On this file we recently learned that Canadian lumber production is now booming as mills have re-opened. The supply response looks to be earlier than most economists expected.
Market Valuation
In a blog post on Thursday, May 6, on the CNBC website: “Rising asset prices in the stock market and elsewhere [housing] are posing increasing threats to the financial system, the Federal Reserve warned. … High asset prices in part reflect the continued low level of Treasury yields. However, valuations for some assets are elevated relative to historic norms even when using measures that account for Treasury yields. In this setting, asset prices may be vulnerable to significant declines should risk appetite fall.”
We scratch our heads – Duh? Where does the Fed think the liquidity that the market thrives on is coming from? Yes, money does get thrown out of helicopters, but the funding for the financial markets has come from the $120 billion/month of Fed purchases of Treasuries and mortgage-backed securities.
We also found this from Fed Governor Lael Brainard (the Governor Biden is reportedly considering as a candidate to replace Jerome Powell as Fed Chair): “Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year. The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.” Sounds very much like the 1996 Greenspan “Irrational Exuberance” warning.
We have suggested in recent blogs that record levels of leverage (margin) and valuations 2.5 standard deviations above their historic means are issues. Nice to know that we are not the only ones with such concerns, and that even prominent Fed governors have the same view.
The “Boom” is Off the Rose
Supply responses indicate that a return to “normal” may not be that far off. The employment numbers, on the other hand, may have to wait a few more months for the work disincentives to disappear. We have maintained, in this blog, that the Q1 GDP growth of 6.4% was partly due to base effects and mainly to two “stimulus” money drops. We don’t see a “boom” economy. The April employment numbers back us up, but so does a lot of other data. Consumption normally occurs out of current income. The chart below shows Real Personal Income Excluding Transfer Payments. Note that there has been no real progress since October, and that current levels are still more than -2% below the February, 2020 peak. Until the huge overhang of CCs is resolved, Real Personal Income won’t improve much. Thus our cynicism about the economic “boom.”
Real Personal Income Less Transfers
(Joshua Barone contributed to this blog.)
